The Canadian economy got off to a surprisingly strong start in the first few months of the first quarter of 2023.
January saw a much stronger than expected increase in real monthly gross domestic product, which rose 0.6% over the month. However, this was largely due to a series of distortions, including one-off government stimulus measures, which helped boost the economy’s overall performance.
As those support measures ended, Statistics Canada reported last week that growth actually slowed in February, with GDP up just 0.1% month-on-month, slightly below market expectations. Preliminary estimates from Statistics Canada point to a modest 0.1% slowdown in growth in March.
All in all, these monthly GDP figures suggest that the Canadian economy performed surprisingly well in the first quarter of 2023. For example, the annualized quarter-on-quarter growth rate for the first quarter is about 2%, which is broadly consistent with the Bank of Canada’s most recent estimates. The surprising strength of GDP growth also confirms the Bank of Canada’s guidance that monetary policy must be “restrictive” to cool an overheated economy.
However, GDP statistics are largely reviews of the economy. Looking at the preliminary March data, the handover to second quarter GDP growth is quite weak and suggests that growth is likely to be negative throughout the quarter. Given the leading growth indicators, we expect growth to remain weak and well below the economy’s potential for the remainder of the year, with the likelihood of a moderate recession.
The deteriorating picture for economic growth, along with rapidly diminishing risks of inflation, is a key reason why the Bank of Canada has opted to hold interest rates steady since March. But it can also be a key reason why the Bank of Canada may need to ease monetary policy tightening by the end of the year.
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